The rise of China is at its heart an economic phenomenon. Its story is the “most astonishing example of economic growth in human history”, Roderick MacFarquhar of Harvard University has pronounced. “Never before has so much wealth been created by so many people in so short a time.” What made it possible for one of the poorest developing economies under communist rule to have been transformed into the world’s second-largest economy in just 30 years? How can we account for this miraculous making of an economic superpower?
Linda Yueh’s China’s Growth grapples with these questions and contributes to unravelling the Chinese puzzle. She is explicit that the country has gone its own way right from 1979, its “Year Zero”. Not only does China have “fairly unique economic drivers”, but its economic transformation has also taken place in “its unusual institutional (and historical) context”. Yueh is, however, equally unequivocal that there is no “China model” and that existing economic theories can explain its phenomenal growth.
At the core of China’s Growth is a meticulously constructed explanatory scheme, which incorporates a number of theoretical lenses ranging from the neoclassical economic growth model to new growth theories. It also identifies, rather innovatively, social networks - guanxi in particular - as important informal drivers for growth. What further sets apart China’s Growth from most of the existing literature is its focus on a microeconomic perspective, which Yueh maintains “can shed light on the details of the key growth drivers”. The microeconomic analysis in the book uses an impressive range of data at the household and company levels. Economic models and mathematical equations in these analyses would be revealing to economists. They are not, however, for the faint-hearted.
Long-standing tensions haunt the microeconomic stories Yueh recounts here. China has had sustained rapid economic growth for more than 30 years without robust market-supporting institutions, with only a nascent legal system and in the absence until recently of any defined property rights. How to explain these anomalies? Informal institutional innovations such as “dual tracks” provide only partial (and less than convincing) explanations. What about another enduring “China paradox”: the omnipresence of state intervention in the market? Why has this not stifled the market, as standard economic theories suggest? Yueh has tried to square the circle by “adapting” them to China, but stops short of asking whether the country’s economic rise is beyond existing theory.
Politics is unsurprisingly not part of Yueh’s explanatory scheme, although she does note that China’s transition to a market economy “occurred without democratization”. Yet who could deny that the biggest paradox in China’s pathway to power is political? An authoritarian and communist government presides over an increasingly liberalised and marketised economy with a remarkable degree of success.
Can this successful growth story continue for another 30 years? Yueh suggests that it can through rebalancing the economy, establishing the rule of law, promoting scientific innovation, deepening financial reform and optimising the size and scope of the state. She does not say whether, or indeed why and how, the making of an economic superpower could happen without political change.
The big question, then, is this: if China continues to grow for another 30 years while the seeming contradiction embedded in its political economy persists, will future economists be as generous as Yueh about existing economic theory? As Lord Patten of Barnes, governor of Hong Kong before its handover to China in 1997, warns, if that happens even the fidelity of our political philosophy will be tested.